The restructuring of the Chinese electricity sector in 2002 reshaped the market structure by vertically unbundling the dominant integrated firm and started the process of wholesale price liberalization. We estimate factor demands to study whether these reforms boosted productivity in the generation segment of the industry. Controlling explicitly for price‐heterogeneity across firms and unobservable productivity shocks, we find that the reforms are associated with reductions in labor and material use of 7 and 5 per cent, respectively. These effects only appear two years after the reforms and are robust to many specification checks. The absolute magnitudes of the estimated restructuring effects vary in intuitive ways by location, firm size or age, and for different definitions of restructured firms.